Lloyds beats forecasts with return to profit

Analysts were forecasting a return to profitability in 2010, but had thought second half profits would offset losses in the first half of the year.

But Lloyds said that a fall in losses on both retail and commercial bad debts had returned it to the black during January, February and March.

Lloyds now expects to deliver a profit on a combined basis at both the half-year and full-year.

Analyst Nic Clarke, at Charles Stanley, said: This was a positive statement from Lloyds Banking Group and if the markets were not so weak it would have got a much better reception.

"The benign state of the economy has led to a better than expected impairment experience which in turn means that the group has been profitable in the first quarter of 2010, somewhat earlier than expected."

"It is very reassuring," said Ian Gordon, analyst at Exane BNP Paribas.

"The main driver being the very positive news on wholesale impairments, but encouragement elsewhere notably in personal unsecured impairments and on revenues."

However, some analysts pointed to concerns about the bank's exposure to the troubled Irish market.

Losses on commercial real estate in Ireland remain a problem although they have passed their peak.

At the end of last year the bank said one in three of its Irish loans, most of them real estate-related, was impaired. Most of the loans were inherited from HBOS.

The bank, which was dragged to a big loss in 2009 by 24bn of bad loans, said bad debt trends had slowed significantly in the first quarter in both the retail and wholesale divisions.

This was due to the modest economic recovery and the management of problem loans.

Finance director Tim Tookey said: "We are seeing lower impairments than we had expected in our guidance at the beginning of the year, so we are ahead of the curve on that. It is very comforting to be inside our own guidance."

Impairments in the wealth and international division remained at a high level in the first quarter, although they are now below the level seen in the fourth quarter of last year.

Lloyds said it is on track to deliver cost savings of 2bn from the HBOS deal by the end of next year.

Part of these savings have come through job losses, with Lloyds axing 11,500 roles last year and more are expected to go this year.

Lloyds said its net interest margin is running in line with guidance and should be about two per cent for 2010.

However, the bank has faced criticism that this higher margin means worse deals for both borrowers and savers.

Lloyds reassured the market on funding saying that customer deposits grew by over 5bn in the first quarter, slightly ahead of forecast growth rates for 2010. The advance was mainly in retail.

It declined to comment on whether an unclear outcome from the General Election would affect its prospects.

The bank has agreed with the Government to lend 44bn to firms and 3bn in mortgages in the coming year, but said it expects to lend 67bn, excluding remortgages, to UK businesses and homeowners.

Lloyds' head of banking Helen Weir has said that Halifax is key to Lloyds' future growth.

"We are absolutely committed to Halifax. I've been very impressed with the quality of staff there," she said.

"They are very loyal, they are high calibre and we've seen a reasonably low level of staff turnover."

Halifax has been one of the least affected areas in terms of job losses. Ms Weir said this was expected to continue this year.

Lloyds' target is to integrate the HBOS businesses by the end of 2011.

Trials of a superbank

The UK superbank formed from Lloyds' takeover of Halifax Bank of Scotland has had a rough ride since its creation in January 2009.

The deal – backed by Gordon Brown at the height of the credit crisis to stave off the nationalisation of ailing HBOS – created a giant with 3,000 branches, 22 million current accounts and 27 per cent of gross mortgage lending.

Lloyds believed the takeover was a good long-term bet, but the toxic baggage brought by HBOS's reckless lending and the impact of recession on its loan book has seen the Government take a 41 per cent stake – initially pumping in 17bn.

Lloyds reported losses of 6.3bn in 2009 after it took a 24bn hit on bad debts largely incurred at Halifax Bank of Scotland.

Despite the hit Lloyds said it was "absolutely committed" to Halifax, which is now seen as one of three core sites alongside London and Edinburgh.